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Anchoring on Credit Spreads

Wed, 04 Feb 2015 06:41:06 GMT

This paper documents that the path of credit spreads since a firm's last loan influences the level at which it can currently borrow. If spreads have moved in the firm's favor (i.e., declined), it is charged a higher interest rate than justified by current fundamentals, while if spreads have moved to the firm's detriment, it is charged a lower rate. We evaluate several possible explanations for this finding, and conclude that anchoring (Tversky and Kahneman (1974)) to past deal terms is most plausible. This article is protected by copyright. All rights reserved.

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